Aftershock (Excerpt)

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Aftershockthe next economy and

americas future

Robert B. Reich

Vintage Books

A Division of Random House, Inc.

New York


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FIRST VINTAGE BOOKS EDITION, APRIL 2011

Copyright 2010, 2011 by Robert B. Reich

All rights reserved. Published in the United States by Vintage Books,

a division of Random House, Inc., New York, and in Canada by Random House

of Canada Limited, Toronto. Originally published in hardcover in

slightly different form in the United States by Alfred A. Knopf,

a division of Random House, Inc., New York, in 2010.

Vintage and colophon are registered trademarks of Random House, Inc.

Grateful acknowledgment is made to Alfred A. Knopf for permission to

reprint an excerpt from Beckoning Frontiers by Marriner S. Eccles,

copyright 1951 by Marriner S. Eccles and renewed 1979 by Sara M. Eccles.

Reprinted by permission of Alfred A. Knopf, a division of Random House, Inc.

The Library of Congress has cataloged the Knopf edition as follows:

Reich, Robert B.

Aftershock : the next economy and Americas future / Robert B. Reich.

Includes bibliographical references and index.

1. United StatesEconomic conditions2009.

2. United StatesEconomic conditions20012009.

3. United StatesSocial conditions21st centuryForecasting. I. Title.

HC106.84.R45 2010

330.973dc22

2010004134

Vintage ISBN: 978-0-307-47633-3

Author photograph Perian Flaherty

Book design by Robert C. Olsson

www.vintagebooks.com

Printed in the United States of America

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The Federal Reserve Board, arguably the most powerful group of

economic decision-makers in the world, is housed in the EcclesBuilding on Constitution Avenue in Washington, D.C. A long,

white, mausoleum-like structure, the building is named after

Marriner Eccles, who chaired the Board from November 1934

until April 1948. These were crucial years in the history of the

American economy, and the worlds.

While Eccles is largely forgotten today, he offered critical in-sight into the great pendulum of American capitalism. His analy-

sis of the underlying economic stresses of the Great Depression

is extraordinarily, even eerily, relevant to the Crash of 2008. It also

offers, if not a blueprint for the future, at least a suggestion of

what to expect in the coming years.

A small, slender man with dark eyes and a pale, sharp face,Eccles was born in Logan, Utah, in 1890. His father, David Eccles,

a poor Mormon immigrant from Glasgow, Scotland, had come to

Utah, married two women, became a businessman, and made a

fortune. Young Marriner, one of Davids twenty-one children,

trudged off to Scotland at the start of 1910 as a Mormon mission-

ary but returned home two years later to become a bank presi-dent. By age twenty-four he was a millionaire; by forty he was a

tycoondirector of railroad, hotel, and insurance companies;

head of a bank holding company controlling twenty-six banks;

and president of lumber, milk, sugar, and construction compa-

nies spanning the Rockies to the Sierra Nevadas.

In the Crash of1929

, his businesses were sufficiently diverse11

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Eccless Insight


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and his banks adequately capitalized that he stayed afloat finan-

cially. But he was deeply shaken when his assumption that the

economy would quickly return to normal was, as we know,

proved incorrect. Men I respected assured me that the economic

crisis was only temporary, he wrote, and that soon all the things

that had pulled the country out of previous depressions would

operate to that same end once again. But weeks turned to months.

The months turned to a year or more. Instead of easing, the eco-

nomic crisis worsened. He himself had come to realize by late1930 that something was profoundly wrong, not just with the

economy but with his own understanding of it. I awoke to find

myself at the bottom of a pit without any known means of scaling

its sheer sides. . . . I saw for the first time that though Id been

active in the world of finance and production for seventeen years

and knew its techniques, I knew less than nothing about its eco-nomic and social effects. Everyone who relied on himfamily,

friends, business associates, the communities that depended on

the businesses he ranexpected him to find a way out of the pit.

Yet all I could find within myself was despair.

When Eccless anxious bank depositors began demanding

their money, he called in loans and reduced credit in order toshore up the banks reserves. But the reduced lending caused

further economic harm. Small businesses couldnt get the loans

they needed to stay alive. In spite of his actions, Eccles had nag-

ging concerns that by tightening credit instead of easing it, he

and other bankers were saving their banks at the expense of

communityin seeking individual salvation, we were contrib-uting to collective ruin.

Economists and the leaders of business and Wall Street

including financier Bernard Baruch; W. W. Atterbury, president

of the Pennsylvania Railroad; and Myron Taylor, chairman of the

United States Steel Corporationsought to reassure the country

that the market would correct itself automatically, and that the

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governments only responsibility was to balance the federal bud-

get. Lower prices and interest rates, they said, would inevitably

lure natural new investments by men who still had money and

credit and whose revived activity would produce an upswing

in the economy. Entrepreneurs would put their money into new

technologies that would lead the way to prosperity. But Eccles

wondered why anyone would invest when the economy was so

severely disabled. Such investments, he reasoned, take place in a

climate of high prosperity, when the purchasing power of themasses increases their demands for a higher standard of living

and enables them to purchase more than their bare wants. In the

America of the thirties what hope was there for developments on

the technological frontier when millions of our people hadnt

enough purchasing power for even their barest needs?

There was a more elaborate and purportedly ethical argu-ment offered by those who said nothing could be done. Many of

those business leaders and economists of the day believed a

depression was the scientific operation of economic laws that

were God-given and not man-made. They could not be interfered

with. They said depressions were phenomena like the one

described in the biblical story of Joseph and the seven kine, inwhich Pharaoh dreamed of seven bountiful years followed by

seven years of famine, and that America was now experiencing

the lean years that inevitably followed the full ones. Eccles wrote,

They further explained that we were in the lean years because we

had been spendthrifts and wastrels in the roaring twenties. We

had wasted what we earned instead of saving it. We had enor-mously inflated values. But in time we would sober up and the

economy would right itself through the action of men who had

been prudent and thrifty all along, who had saved their money

and at the right time would reinvest it in new production. Then

the famine would end.

Eccles thought this was nonsense. A devout Mormon, he saw

Eccless Insight / 13


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that what passed for the God-given operation of economics was

nothing more than a determination of this or that interest, spe-

cially favored by the status quo, to resist any new rules that might

be to their disadvantage. He wrote, It became apparent to me, as

a capitalist, that if I lent myself to this sort of action and resisted

any change designed to benefit all the people, I could be con-

sumed by the poisons of social lag I had helped create. Eccles also

saw that men with great economic power had an undue influ-

ence in making the rules of the economic game, in shaping theactions of government that enforced those rules, and in condi-

tioning the attitude taken by people as a whole toward those rules.

After I had lost faith in my business heroes, I concluded that I and

everyone else had an equal right to share in the process by which

economic rules are made and changed. One of the countrys

most powerful economic leaders concluded that the economicgame was not being played on a level field. It was tilted in favor of

those with the most wealth and power.

Eccles made his national public debut before the Senate Finance

Committee in February 1933, just weeks before Franklin D.Roosevelt was sworn in as president. The committee was hold-

ing hearings on what, if anything, should be done to deal with

the ongoing economic crisis. Others had advised reducing the

national debt and balancing the federal budget, but Eccles had

different advice. Anticipating what British economist John May-

nard Keynes would counsel three years later in his famous GeneralTheory of Employment, Interest and Money, Eccles told the sena-

tors that the government had to go deeper into debt in order to

offset the lack of spending by consumers and businesses. Eccles

went further. He advised the senators on ways to get more money

into the hands of the beleaguered middle class. He offered a pre-

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cise program designed to bring about, by Government action, an

increase of purchasing power on the part of all the people.

Eccles arrived at these ideas not by any temperamental or

cultural affinityhe was, after all, a banker and of Scottish

descentbut by logic and experience. He understood the econ-

omy from the ground up. He saw how average people responded

to economic downturns, and how his customers reacted to the

deep crisis at hand. He merely connected the dots. His proposed

program included relief for the unemployed, government spend-ing on public works, government refinancing of mortgages, a fed-

eral minimum wage, federally supported old-age pensions, and

higher income taxes and inheritance taxes on the wealthy in order

to control capital accumulations and avoid excessive specula-

tion. Not until these recommendations were implemented, Eccles

warned, could the economy be fully restored.Eccles then returned to Utah, from where he watched Roo-

sevelt hatch the first hundred days of his presidency. To Eccles, the

new presidents initiatives seemed barely distinguishable from

what his predecessor, Herbert Hoover, had offereda hodge-

podge of ideas cooked up by Wall Street to keep it afloat but do

little for anyone else. New York, as usual, seems to be in thesaddle, dominating fiscal and monetary policy, he wrote to

his friend George Dern, the former governor of Utah who had

become Roosevelts secretary of war.

In mid-December 1933, Eccles received a telegram from Roo-

sevelts Treasury secretary, Henry Morgenthau, Jr., asking him to

return to Washington at the earliest possible date to talk aboutmonetary matters. Eccles was perplexed. The new administra-

tion had shown no interest in his ideas. He had never met Mor-

genthau, who was a strong advocate for balancing the federal

budget. After their meeting, the mystery only deepened. Morgen-

thau asked Eccles to write a report on monetary policy, which



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Eccles could as easily have written in Utah. A few days later Mor-

genthau invited Eccles to his home, where he asked about Eccless

business connections, his personal finances, and the condition of

his businesses, namely whether any had gone bankrupt. Finally,

Morgenthau took Eccles into his confidence. Youve been recom-

mended as someone I should get to help me in the Treasury

Department, Morgenthau said. Eccles was taken aback, and

asked for a few days to think about it.

Here you are, Marriner, full of talk about what the govern-ment should and shouldnt do, Eccles told himself, as he later

recounted in his memoirs. You ought to put up or shut up. . . .

Youre afraid your theory wont work. Youre afraid youll be a

damned fool. You want to stick it out in Utah and wear the hair

shirt of a prophet crying in the wilderness. You can feel noble that

way, and you run no risks. [But] if you dont come here youllprobably regret it for the rest of your life. Eccles talked himself

into the job.

For many months thereafter, Eccles steeped himself in the

work of the Treasury and the Roosevelt administration, pushing

his case for why the government needed to go deeper into debt to

prop up the economy, and what it needed to do for average peo-ple. Apparently he made progress. Roosevelts budget of 1934 con-

tained many of Eccless ideas, violating the presidents previous

promise to balance the federal budget. The president swallowed

the violation with considerable difficulty, Eccles wrote.

The following summer, after the governor of the Federal Re-

serve Board unexpectedly resigned, Morgenthau recommendedEccles for the job. Eccles had not thought about the Fed as a

vehicle for advancing his ideas. But a few weeks later, when the

president summoned him to the White House to ask if hed be

interested, Eccles told Roosevelt hed take the job if the Federal

Reserve in Washington had more power over the supply of money,

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and the New York Fed (dominated by Wall Street bankers) less.

Eccles knew Wall Street wanted a tight money supply and corre-

spondingly high interest rates, but the Main Streets of America

the real economyneeded a loose money supply and low rates.

Roosevelt agreed to support new legislation that would tip the

scales toward Main Street. Eccles took over the Fed.

For the next fourteen years, with great vigor and continuing

vigilance for the welfare of average people, Eccles helped steer the

economy through the remainder of the Depression and throughWorld War II. He would also become one of the architects of the

Great Prosperity that the nation and much of the rest of the world

enjoyed after the war.

Eccles retired to Utah in 1950 to write his memoirs and reflect onwhat had caused the largest economic trauma ever to have

gripped America, the Great Depression. Its major cause, he con-

cluded, had nothing whatever to do with excessive spending dur-

ing the 1920s. It was, rather, the vast accumulation of income in

the hands of the wealthiest people in the nation, which siphoned

purchasing power away from most of the rest. This was Ecclessbiggest and most important insight. It has direct bearing on the

Great Recession that started at the end of 2007. In Eccless words:

As mass production has to be accompanied by mass con-

sumption, mass consumption, in turn, implies a distribu-

tion of wealthnot of existing wealth, but of wealth as it iscurrently producedto provide men with buying power

equal to the amount of goods and services offered by the

nations economic machinery. Instead of achieving that kind

of distribution, a giant suction pump had by 19291930

drawn into a few hands an increasing portion of currently



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